As a small business owner, you can contribute not only to your company's 401(k), SEP or SIMPLE IRA, but to a Roth IRA too, if you meet the income restrictions. By augmenting your retirement savings strategy with a Roth IRA, you'll be able to maximize your retirement savings in tax advantaged accounts to the full extent that the law allows. And who doesn't want to take advantage of such a golden opportunity for savings?

But first, let's answer this question: What makes the Roth IRA different from other retirement accounts? When you contribute to a Roth IRA, you fund the account with after-tax dollars. Since you've already paid tax on the money you're investing for your future, when that future finally arrives you can withdraw the funds from your account without paying any additional taxes. It's yours free and clear, and it's been growing tax free.

With other retirement accounts, the distributions you begin to take at age 70½ are taxable. The tax you pay will be dependent upon your tax bracket at the time of distribution. Although many people anticipate that their tax bracket will be lower, this is not always the case. With age, you could lose important deductions. Children have left home, or you may have paid off the mortgage that provided a deduction for so many years. If you have some retirement income you've paid taxes on, and other income that is tax free, you'll be positioned to develop strategies to minimize your overall tax liability.

Another benefit to the Roth IRA is that you can continue to contribute to the account at any age, even past retirement, as long as you are earning taxable income. If you're not working but your spouse is, your spouse can continue to contribute to the account on your behalf.

The bad news is that once your income hits a certain level, you're no longer eligible to contribute to a Roth IRA. Eligibility is based on your modified adjusted gross income (MAGI). For single filers in 2018, once your MAGI climbs to $120,000 your contribution limit is reduced, and it's phased out entirely when your income hits $135,000. If you're married and filing jointly, contributions are reduced starting at a combined  income of $186,000 and phased out completely at $199,000.

Roth IRAs differ from other types of IRAs in two other important ways, as well. First of all, should you find yourself in need of funds, you can withdraw your Roth contributions any time for any reason at all. This is certainly not the case with SEP, SIMPLE, or traditional IRAs. However, if you want to withdraw investment earnings before the age of 59½ for any non-qualifying reason, you'll be forced to pay a penalty.

And finally, if you have a Roth IRA, you're not forced to begin taking required minimum distributions at the age of 70½. Nor are you prohibited from continuing to make contributions. If you're not ready to retire, you can still keep growing your nest egg for the day you finally are.

Changes to Roth IRAs in 2018

Changes to the tax law at the end of 2017 created a lot of confusion. Many people, including small business owners, wondered if they could or should contribute to a Roth IRA and other retirement accounts, given the new rules.

However, retirement saving in 2018 will largely remain unchanged compared with previous years. The one notable change to Roth IRAs only affects some account holders and not all. It will no longer be possible in 2018 to recharacterize Roth IRA conversions.This doesn't matter in terms of tax planning but can change a small business's financial planning strategy.

Previously, it was possible to add money to a Roth IRA by converting some other account such as a traditional IRA. Previously, if you needed to undo this conversion, you could do so through recharacterization. In 2018 and beyond, this ability to recharacterize in order to undo a conversion from one form of account into a Roth IRA will be eliminated. Recharacterization allowed people to avoid unfavorable tax scenarios they could not foresee when they made a conversion. Going forward, those converting an account will need to be more cautious, as they'll have a reduced ability to undo any such decision.

This article was updated March 5, 2018.

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